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Section 1: Economic Systems Section 2: Evaluating Economic Performance Chapter Introduction Section 1: Economic Systems Section 2: Evaluating Economic Performance Section 3: American Free Enterprise Visual Summary Chapter Menu

Every society has an economic system to allocate goods and services. Chapter Intro 2

Section Preview In this section, you will learn about the different types of economic systems that govern WHAT goods and services to produce, HOW to produce them, and FOR WHOM to produce them. Section 1-Preview

Economic Systems All societies use an economic system to provide for needs and wants of their people. Three major economic systems exist: Traditional Command Market Comparing Economic Systems Section 1

Economic Systems (cont.) Most economies combine elements of the three. Comparing Economic Systems Section 1

Traditional Economies Traditional societies use ritual, habit, or customs to answer the basic questions of WHAT, HOW, and FOR WHOM to produce. Section 1

Traditional Economies (cont.) A traditional economy—use of scarce resources and economic activity is based on habit or custom. Section 1

Traditional Economies (cont.) Advantages Everyone knows which role to play. Little uncertainty on what or how to produce. Customs and traditions determine who is provided for. Section 1

Traditional Economies (cont.) Disadvantages Individuals generally not free to make decisions New ideas discouraged, leading to stagnation and a lower standard of living Strict rules defined by elders and ancestors Section 1

Command Economies Command economies rely on a central authority to make most of the economic decisions. Section 1

Command Economies (cont.) A central authority makes the major decisions in a command economy. Section 1

Command Economies (cont.) Advantages Can change direction drastically through emphasizing/allocation Health and public services available to everyone at little or no cost Section 1

Command Economies (cont.) Disadvantages Basic wants and needs of consumers are ignored. Economies tend to be unproductive, not producing a good product. Large decision-making bureaucracy lacks flexibility. Section 1

Command Economies (cont.) Severely limits private property rights Individual freedom and initiative are limited. Section 1

Market Economies In a market economy, consumers and businesses jointly answer the questions of WHAT, HOW, and FOR WHOM to produce. Section 1

Market Economies (cont.) A market economy allows people to make decisions in their own best interest. Buyers and sellers exchange goods and services in a market. Market economies are based on capitalism. Capitalism means that the factors of production are privately owned. Section 1

Market Economies (cont.) Advantages High degree of individual freedom Adjusts gradually to change over time Small degree of government interference Decision making is decentralized Large variety of goods and services High degree of consumer satisfaction Section 1

Market Economies (cont.) Disadvantages Not everyone is provided for May not provide enough of some basic goods and services High degree of uncertainty for workers and employers Section 1

Mixed Economies Most economies in the world today feature some mix of traditional, command, and market economies. Section 1

Mixed Economies (cont.) Most economies in the real world are mixed economies. When political systems are considered with economic systems, the picture gets more complicated. An example is socialism and its extreme, communism. The Spectrum of Mixed Economies Section 1

Mixed Economies (cont.) The type of political system in a mixed economy is less important than the way basic economic decisions are made. The Spectrum of Mixed Economies Section 1

Mixed Economies (cont.) Advantages of a mixed economy Provides assistance for some people who might otherwise be left out In a democratic society, voters use electoral power to affect WHAT, HOW, and FOR WHOM decisions. In a socialist society, FOR WHOM is addressed more directly by government. Section 1

Mixed Economies (cont.) Disadvantages More services mean higher costs for citizens overall. In socialist countries, availability of services may be limited or quality deteriorates over time. Section 1

What is the main advantage of a mixed economy? A. Ownership and control by government B. More services are provided at a higher cost to citizens. C. Provides assistance to people otherwise left out A B C Section 1

Section 1-End

Section Preview In this section, you will learn how economic freedom, economic security, and economic equity are related to the level of satisfaction people have with their economic systems. Section 2-Preview

What happens when our economic system fails to achieve our goals? A. Societies demand laws to modify system until needs are met. B. The government collapses. C. A command society results. D. Inflation occurs. A B C D Section 2

Economic and Social Goals Americans share several major economic and social goals. Section 2

Economic and Social Goals (cont.) In the United States, there are seven major economic and social goals: Economic freedom Economic equity The minimum wage was established on a national level. Many states established lemon laws. Section 2

Economic and Social Goals (cont.) Economic security Social Security was established for disabled or retired beneficiaries. Full employment Section 2

Economic and Social Goals (cont.) Price stability Inflation makes paying bills difficult for individuals on a fixed income. High rates of inflation discourage business activity. Economic growth Section 2

Economic and Social Goals (cont.) As our society evolves, more goals may become important to us. Section 2

Resolving Trade-Offs Among Goals Conflicts among goals can be solved by comparing the cost of a goal to its benefit. Section 2

Resolving Trade-Offs Among Goals (cont.) Individuals have different ideas on how to reach a goal or on the goal itself. Our economic policies have opportunity costs and trade-offs. Section 2

Resolving Trade-Offs Among Goals (cont.) In many cases, trade-offs among goals are resolved when people compare their estimate of the costs to their estimate of the benefits and then vote for candidates accordingly. The U.S. economy is flexible enough to allow choices, accommodate compromises, and still satisfy the majority of Americans. Section 2

Section 2-End

Section Preview In this section, you will learn how under capitalism the basic economic decisions of WHAT, HOW, and FOR WHOM to produce are made through the free interaction of individuals looking out for their own best interests. Section 3-Preview

American Free Enterprise In many parts of the world, capitalism has become the economic choice. Capitalism allows private citizens to own and use the factors of production to generate profits. The U.S. economy is based on free enterprise. Characteristics of Free Enterprise Capitalism Section 3

American Free Enterprise (cont.) Capitalism and free enterprise are often used interchangeably, although meanings are different. Capitalism stands for the private ownership of resources. Free enterprise is the unhindered use of privately owned resources to earn profits. Characteristics of Free Enterprise Capitalism Section 3

Characteristics of Free Enterprise Capitalism The American economy incorporates the main characteristics of a free enterprise economy. Section 3

Characteristics of Free Enterprise Capitalism (cont.) There are five major characteristics of a free enterprise economy: Economic freedom Voluntary exchange Characteristics of Free Enterprise Capitalism Section 3

Characteristics of Free Enterprise Capitalism (cont.) Private property rights Private property gives individuals incentive to work, save, and invest. Profit motive People are free to take risks to earn a profit. Competition Characteristics of Free Enterprise Capitalism Section 3

The Role of the Entrepreneur Entrepreneurs are the driving force of the free enterprise system. Section 3

The Role of the Entrepreneur (cont.) Entrepreneurs Organize and manage land, capital, and labor to gain a profit Are the people who start up new businesses Want to “be their own boss” Are willing to take risks Section 3

The Role of the Entrepreneur (cont.) Entrepreneurs are both the spark plug and the catalyst of the free enterprise economy. Their search for profits leads to a chain of events that brings New products Greater competition Section 3

The Role of the Entrepreneur (cont.) More production Higher quality Lower prices for consumers Profiles in Economics: Tony Hawk Section 3

Why might an entrepreneur fail? A. Not enough capital B. Poor product or service C. Not aware of competition D. All of the above A B C D Section 3

The Role of the Consumer The economy in the United States adapts to consumers’ wants. Section 3

The Role of the Consumer (cont.) Consumers ultimately determine which products are produced. If consumers like a new product, producers are rewarded with profits. Consumers not purchasing a product can cause a firm to go out of business. Section 3

The Role of the Consumer (cont.) The phrase “the customer is always right” recognizes consumer sovereignty. Consumers are always looking for new ideas and products. Section 3

Do you believe that “the customer is always right”? A. Always B. Sometimes C. Never A B C Section 3

The Role of the Government The economic role of the U.S. government is decided by its citizens. Section 3

The Role of the Government (cont.) The role of government stems from the desires, goals, and aspirations of its citizens. Section 3

The Role of the Government (cont.) Government has become A protector Provider Regulator Consumer Section 3

The Role of the Government (cont.) In general, the role of government in the economy is justified whenever the benefits outweigh the costs. An unintended consequence of government’s role is the emergence of the mixed or modified free enterprise economy. Section 3

The Role of the Government (cont.) Some people prefer to have no government involvement in the economy—which is not possible. Services like a national defense and a system of laws and justice cannot be supplied by the private sector alone. Section 3

Section 3-End

Economic Systems Most countries have a mix of three different types of economic systems. VS 1

Economic and Social Goals In the United States, we share several economic and social goals. VS 2

Free Enterprise The U.S. economic system is based on the free enterprise system and is characterized by competition and private ownership of resources. VS 3

VS-End

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Tony Hawk (1968– ) professional athlete at age 14 and best skateboarder in the world by age 16 owner of a successful business empire based on resurgence of skateboarding and name recognition Profile

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economic system  organized way in which a society provides for the wants and needs of its people Vocab1

traditional economy  economic system in which the allocation of scarce resources and other economic activities are based on ritual, habit, or custom Vocab2

command economy  economic system characterized with a central authority that makes most of the major economic decisions Vocab3

market economy  economic system in which supply, demand, and the price system help people make decisions and allocate resources Vocab4

market  meeting place or mechanism that allows buyers and sellers to come together Vocab5

capitalism  economic system in which private citizens own and use the factors of production in order to generate profits Vocab6

mixed economy economic system that has some combination of traditional, command, and market economies Vocab7

socialism political and economic system in which the government owns and controls some factors of production Vocab8

communism economic and political system in which all factors of production are collectively owned and controlled by the state Vocab9

stagnation  lack of movement Vocab10

allocate  to assign Vocab11

emphasizing  stressing Vocab12

minimum wage lowest wage that can be paid to most workers Vocab13

Social Security federal program of disability and retirement benefits that covers most working people Vocab14

inflation rise in the general level of prices Vocab15

fixed income income that does not increase even though prices go up Vocab16

adverse  unfavorable or harmful Vocab17

accommodate  to allow for Vocab18

free enterprise capitalistic economy in which competition is allowed to flourish with a minimum of government interference Vocab19

voluntary exchange act of buyers and sellers freely and willingly engaging in market transactions Vocab20

private property rights fundamental feature of capitalism that allows individuals to own and control their possessions as they wish Vocab21

profit extent to which persons or organizations are better off financially at the end of a period than they were at the beginning Vocab22

profit motive incentive that encourages people and organizations to improve their financial and material well-being Vocab23

competition the struggle among sellers to attract consumers Vocab24

consumer sovereignty role of consumer as ruler of the market when determining the types of goods and services produced Vocab25

mixed or modified free enterprise economy economy where people carry on their economic affairs freely but are subject to some government intervention and regulation Vocab26

incentive  something that motivates Vocab27

catalyst something that stimulates activity among people or forces Vocab28

regulator  someone or something that controls activities Vocab29

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